Fuel cell stocks: idle speculation or diamonds in the rough?

Chris Lau, Kapitall: Fuel cell stocks have taken a hit as market speculation gave way to defensive fear. Is it time for a second look?

The quick rise and fall in fuel cell firms preceded the general decline in stock markets. Now that sentiment is firmly negative, investors holding FuelCell Energy (FCEL) will wonder if its stock will revisit old highs.

Stocks action is news driven

FuelCell Energy is still up 160% despite closing sharply below its $3.93 high reached on March 10 2014. Buying peaked after the firm reported fiscal Q1 earnings loss of $0.04 per share. Revenue was $44.43 million, up 22.1% from the previous year.

Negativity began after Citron said Plug Power (PLUG) had no value. While FuelCell shares were supported by the hope that order levels would grow by fourfold, even good news is not pushing share price higher now. FuelCell’s CEO said it expected to sign its first megawatt scale project in Europe in 2014.

Realistically, the project size announced is still too small to benefit from economies of scale. Without bigger contracts, costs may remain elevated.

Hydrogenics Corporation (HYGS) is another fuel cell firm that sold off, falling more so than FuelCell Energy.

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Hydrogenics’s wind-power-to-gas (P2G) technology may have a technological advantage. The firm won a 1 megawatt contract last year to German utility E.ON. Hydrogenics’s stock dropped by double digits the day it said Q1 revenue would be lower than analyst estimates. The firm sees revenue in Q1 as low as $7 million, though analysts expected Hydrogenics to report revenue of $11.7 million. Despite the quarterly miss, revenue is expected to be higher than $50 million. It also expects to be profitable on an EBITDA basis.

Conclusion

Fuel Cell stocks hold promise, but risks are elevated when investors reduce their appetite for risk. These two stocks are still considered speculative due to the uncertain growth in backlog. Still, they should be added to a watch list for now.

Do you think fuel cells are about to break out? Use the list below to begin your own research.

1. Plug Power Inc. ( PLUG): is engaged in the design, development, manufacture, and commercialization of fuel cell systems for the industrial off-road markets worldwide. Market cap at $310.52M, most recent closing price at $3.69.